To boost productivity, just do what Henry VIII did

What can slow-growing western economies do to boost their productivity? The answer lies behind us, but also beneath our feet. Or, to put it less gnomically, history shows us that land reform is crucial to economic progress.

A fascinating example is the relationship between the Dissolution of the Monasteries in 16th Century England and the Industrial Revolution a couple of centuries later. This is the subject of a rather brilliant piece of research by Leander Heldring, James Robinson and Sebastian Vollmer, which they write about for VoxEU.org.

They begin with the historical context:

“…[when] Henry VIII decided to break with the Catholic Church… he expropriated all monasteries in England, which collectively held about one third of all land in the country…

“When the management of these vast properties turned out to outstrip the bureaucratic capacity of his government, Henry sold all monastic assets in England.”

This was a lot of land, but why was its change of ownership so significant?

“Where lands were before held in long leases whose rates were set by medieval custom, lands now changed hands frequently and at market rates. In a few years between 1535 and 1542, the majority of monastic land was sold…

“The historical consensus on the immediate impact of the Dissolution was to break up archaic forms of land tenure and create a land market…”

Markets are all about the efficient allocation of scarce resources; and land (which they’re not making anymore) is an indispensable input to just about every economic activity. Henry was a brutal despot, but in selling off so many stolen acres, he accidentally created the basis for a modern enterprise economy – one capable of nurturing the seeds of an industrial revolution.

That’s the theory, but where’s the proof? Luckily for the researchers, English land records go back a long way. It also helps that monastic land holdings were not evenly distributed – thereby allowing those villages that were impacted by Henry’s ‘reforms’ to be compared against those that weren’t (because they didn’t contain much, or any, monastic land for Henry to confiscate):

“We choose comparison villages that lie close to impacted villages so as to make them comparable. When we statistically estimate the effect of having more monastic assets in a village in 1535 on industrialisation, we find a large positive effect – villages that had more monastic assets (by value) were more likely to have at least one textile mill by 1836 and employed more people in the textile industry.”

As well as a more industrialised workforce, the researchers also found that the former monastic villages had “higher productivity in agriculture” and were associated with a greater number of agricultural patents.

The Industrial Revolution was the most important economic event in human history – and its birthplace was Britain. No one is arguing it was the sole result of the Dissolution, but the contribution of a functioning land market to the growth of entrepreneurial culture not only makes sense, it also appears to be supported by the evidence.

Fascinating stuff, but of what relevance is it to us today? Well, despite the digital age, land (in the right place) is still a vital economic input. And though most medieval customs may be long gone, we have many modern restrictive practices that stop land markets from working as they should.

For instance, governments are shockingly bad at making the most productive use of their own extensive land holdings – including those in high-value global cities like London. Property developers use land banking and land option techniques to sew up and carefully ration the supply of land for new housing. Investment companies hold on to high-value sites in commercially attractive locations, not bothering to regenerate them because the rising value of the asset is all they need in showing off their balance sheets to shareholders. And most stupidly of all, tax systems treat property speculation, land hoarding and rent extraction as if they were a socially useful, economically productive activities and not the parasite on growth they actually are.

While not copying his methods, any government presiding over a sluggish economy needs to follow the example of Henry VIII – breaking up land monopolies and freeing the productive potential of local economies.